Introduction: The CNET website recently published an article stating that through Apple's halo effect, the iPhone has driven mobile operator user and revenue growth. However, operators have also paid a huge price in this process. Some analysts believe that the iPhone has become a habit that operators cannot kick.
The following is the main content of the article:
"Double-edged sword" and "drug"
Should mobile operators get used to the iPhone? So far, the public generally believes that the iPhone is a double-edged sword for operators. On one hand, operating the iPhone comes with great costs. Operators need to pay high subsidies to make the phone price competitive. On the other hand, the iPhone can increase user loyalty, making users pay higher monthly fees.
Apple's success has already impacted operators. In every quarter where the iPhone sales are strong, operators need to pay higher subsidies. This has adversely affected the profits of operators, as reflected in Verizon and AT&T's Q4 financial reports.
Although some operators believe that short-term negative impacts will lead to long-term success, due to Apple continuously upgrading its phones, operators need to keep subsidizing users' phone purchases. This undoubtedly does not favor long-term success. On the other hand, iPhone users always feel dissatisfied with their current products and hope for quicker upgrades.
This raises a question: after the iPhone becomes a key source of growth, operators must endlessly subsidize this phone. Sanford Bernstein analyst Craig Moffett said: "Currently, the iPhone is like a drug, and operators have become addicted. The issue isn't whether it's worth it, but whether operators can develop without the iPhone."
Impact on Operator Profit Margins
The demand for the iPhone has been surprising. Verizon stated that last quarter, the number of iPhone activations was 4.3 million units, exceeding half of the carrier's total smartphone sales during the same period. Most of the iPhone activations came from existing users. Last quarter, Verizon added 1.2 million contract users.
The growth in iPhone sales also came at a cost for Verizon. After excluding one-time pension-related expenses, Verizon's earnings per share in Q4 last year was 52 cents, which was 2 cents lower than Wall Street's average estimate. EBITDA fell by 1.1% year-on-year. In Q4 of 2010, without the iPhone, Verizon's profit increased by 5.5%.
However, Verizon is pleased with the user growth brought by the iPhone and expects fluctuations in profit margins in the coming quarters. Verizon CFO Fran Shammo said in a conference call: "The sales volume in Q4 exceeded our expectations, and it's clear that we will have more growth opportunities in 2012."
AT&T stated that last quarter they activated 7.6 million iPhones, most of whom chose the iPhone 4S. However, the number of new contract users in that quarter was only 717,000. AT&T's performance over the past few years has proven Moffett's concerns. Since introducing the iPhone and providing subsidies, AT&T's profit margin has declined. In Q4, AT&T's wireless business profit margin dropped by one-third compared to the previous year.
Similar to Verizon, AT&T still looks positively at the long-term value brought by the iPhone. AT&T CEO Randall Stephenson said in a conference call: "Overall, I am still optimistic about the smartphone business and the iPhone. I'm not worried about this market."
Despite pressure on profit margins, Stephenson believes that smartphones as a platform help operators sell more services, including tablets and other interconnected devices.
However, some investment banks do not agree with this view. Morgan Stanley analyst Simon Flannery said he expects the average revenue per user (ARPU) growth for mobile operators to slow down. Besides data services, many operators will face declining revenues from voice and text message services.
Sprint has placed a bigger bet on the iPhone than other operators. The company's performance is now closely tied to the future success of the iPhone. Reports suggest that Sprint has paid Apple $20 billion to purchase 30 million iPhones over the next four years. Sprint CEO Dan Hesse and his team were very happy to gain the rights to operate the iPhone.
However, after all three national U.S. carriers began offering the iPhone, none of them had exclusive rights anymore. Moffett said: "Sprint decided to bet its entire future on the iPhone, and ended up just getting the same rights to operate the iPhone."
High Network Construction Costs
After operating the iPhone, operators need to increase capital expenditures to build networks to meet the increasing data service demands of iPhone and other smartphone users. Operators usually don't increase network operation costs for specific phones, but there's no doubt that under such circumstances, operators need to strengthen network infrastructure.
AT&T stated that they are still expanding network coverage and improving service quality in major markets like New York and San Francisco. The company said they made 150,000 improvements to the network last year. Before operating the iPhone, Sprint executives also said they were preparing to handle high data traffic brought by smartphones and other products.
In recent years, although Android devices have been the main reason for the increase in data traffic, the launch of the iPhone 4S and Siri also increased user demand for data services. Because Siri continuously connects to Apple's servers to retrieve information, the data usage of the iPhone 4S is typically twice that of the iPhone 4.
Currently, the iPhone supports 3G networks. However, U.S. operators are upgrading their networks to build faster and more efficient 4G networks. Operators have taken measures to deal with the impact of the iPhone. AT&T was the first operator to adopt tiered pricing and recently increased the fee for smartphone data services. Sprint raised the early termination fee and shortened the product return time window.
There is no doubt that the iPhone brings advantages to operators. The iPhone attracts many new users and makes it easier for operators to retain existing users. This became evident after AT&T lost the exclusive rights to operate the iPhone in the U.S. AT&T also sells older iPhones at discounted prices to expand the iPhone user base.
Without the iPhone, Verizon and AT&T would not be able to achieve the same level of user growth. At the very least, the iPhone ensures that operators won't lose users. Hesse once said that because Verizon and AT&T operate the iPhone, Sprint cannot retain users. He believed that as long as they could retain users for a longer period, Sprint would be able to generate profits from these users.
However, Sprint is currently "walking a tightrope." Besides paying high subsidies for the iPhone, the company is also building a 4G LTE network. These two efforts will significantly reduce Sprint's profit margin over the next two years. For a long time, the iPhone was exclusively operated by AT&T in the U.S., benefiting both Apple and AT&T. Verizon and Sprint will not be able to gain this advantage in the short term.
Some analysts remain optimistic about the long-term value brought by the iPhone. Robert Baird analyst William Power said Verizon's profits will grow this year.
T-Mobile USA also hopes to operate the iPhone. At this year's Consumer Electronics Show (CES) in Las Vegas, T-Mobile USA CEO Philipp Humm admitted that the company lost users due to not operating the iPhone. T-Mobile USA CTO Neville Ray said that the next generation of the iPhone will technically support the frequency bands used by T-Mobile USA.
(Translated by Yuet Qiu)
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